Central Provinces Tell Different Stories

Ontario’s economy is performing relatively well while Québec waits for an uptick.

Interview by Rachel Duran

Editor’s Note:For the latest information in regard to the forecast for the Canadian economy, visit www.conferenceboard.ca.

So far this year, consumer spending in Canada has been moderate, employment growth weak, and government spending by both the federal government and provincial governments restrained. These components are holding back growth over the near term; nevertheless, Canada’s economy is expected to grow by 2.2 percent in 2012.

Strong points include an increase in housing starts, a vibrant mining sector, and good growth in exports, backed by a renewed auto industry. Ontario’s economy is a beneficiary of the auto comeback. Meanwhile, Québec’s leading export industry focuses on the aerospace industry, which has been slow to come back.

Marie-Christine Bernard of the Conference Board of Canada highlights the state of the national economy, as well as the economies of Ontario and Québec.

Global Corporate Xpansion:Tell us how the Canadian economy stands at the midpoint of 2012.

Marie-Christine Bernard: Since the last time we spoke in April [interview conducted in July] the outlook for 2012 is much the same, with growth forecast at 2.2 percent. In 2011, the Canadian economy grew 2.4 percent.

There has not been much job creation since the last few months of 2011. This is affecting income gains and consumer confidence.

Also hitting the Canadian economy in 2012 is government fiscal restraint, at both the federal and provincial levels. Most provinces have announced cuts to certain programs. We are not seeing net growth in government spending on goods and services in real terms. This is the first time we are seeing cuts since the mid-1990s. This will hold back real GDP growth over the near term.

GCX: What are the positives?

Bernard: Housing markets have been fairly strong in the last few months, particularly in Ontario and out west. That is helping the Canadian economy as there are mainly multiple unit projects under development.

There are also investments on the nonresidential side, mainly coming from the mining sector, which is boosting the forecast for the northern parts of Canada. The outlook is favorable for most metals important to Canada such as gold and iron ore. New mines are starting to produce and other mines are coming back on line.

The forecast for the trade sector is strong. A lot of it is due to the resource sector, as well as the auto industry, which in Canada is now producing at near capacity as vehicle sales have improved in the United States.

What will really hold back growth in Ontario is fiscal austerity. The federal sector is important to the economy of Ontario, with the federal capital located in Ottawa. The government is going through with some of the job cuts that were planned in the budget. It is filtering through the economy.

GCX: How is the rebound in the auto sector playing out in Ontario, which is home to a large auto manufacturing cluster?

Bernard: The outlook is similar to what we project for Canada. Both Canada and Ontario are forecast to see 2.2 percent growth for real GDP in 2012. This follows growth of 2.1 percent in 2011 for Ontario.

Ontario as a province is doing better than what we thought just a few months ago. There are stronger export numbers, and housing starts have been elevated. The housing resale market is doing quite well.

In regard to nonresidential investment we are seeing some growth, perhaps not as strong as what we see at the Canadian level. The mining industry is not as important in Ontario. There are several projects in the province, but generally mining is a smaller part of the economy compared to other provinces.

In other indicators we saw a moderation in consumer demand in the second half of 2011. So far this year, consumer demand has been quite good. We should see fairly strong consumer spending in 2013.

What will really hold back growth in Ontario is fiscal austerity. The federal sector is important to the economy of Ontario, with the federal capital located in Ottawa. The government is going through with some of the job cuts that were planned in the budget. It is filtering through the economy. We will be weak on the government side for a few years.

There will also be pull back in infrastructure spending at the provincial level. The Ontario government has a long way to go to balance the books. They are following a five-year plan holding back infrastructure spending, program spending, and freezing wages for civil servants.

Despite the fiscal austerity, due to the positives in other sectors, Ontario’s economy is not doing too badly.

GCX: How is the economy of Québec faring at this point in the year?

Bernard: The economic picture is a little different than Ontario, and things are more difficult. There were severe job losses at the end of 2011, and the beginning of 2012. Québec’s economy grew by 1.7 percent in 2011; and we are forecasting 1.4 percent growth for 2012.

Employment has improved over the last few months, but nevertheless, the effects are still showing up in the economy. Consumer confidence is not recovering very fast and consumer spending is weak. There was no growth in the first quarter.

The fiscal austerity started in Québec a few years ago. Relative to the size of the economy, Québec has a significant debt compared to other provinces. The government issued a plan a couple of years ago and there have been increases in the provincial sales tax; one at beginning of 2011; and one at the beginning of 2012.

In terms of fiscal austerity, in addition to the increases in the provincial sales tax, the government has also put in place fees and tariffs and other forms of taxes that are raising the tax burden. This is all weighing on consumer spending.

Things are not as harsh in terms of cuts to program spending or restraining spending in health care and education. The restraint is not as severe as what we see in Ontario because it was put in place a few years ago.

Housing in Québec is doing alright, but things are not booming like they are in Ontario. There won’t be any help from investments in residential construction.

A bright spot is that the mining sector is developing rapidly, and is doing well. Last year the government put together a plan to further develop the northern part of the province.

The prices for certain metals that are produced in Québec are still quite favorable. There are investments underway to expand iron ore production and new mines for other metals.

Unlike Ontario, however, Québec’s main export commodity is the aerospace sector, which hasn’t completely recovered from the recession. The outlook for the trade sector is very modest. That is why we see a much weaker bottom line growth in Québec compared to Ontario.

Growth will remain sluggish in the province and we are projecting growth of 1.8 percent in 2013.

There will be a decline in housing starts and population growth is weaker in Québec than in Ontario. That will affect the housing market, which will reflect the demographic requirements of the province. What’s more, some of the mining projects will be completed so we should not see any growth in nonresidential investments in 2013.

GCX: What impressions do you want to share in regard to the opportunities for foreign direct investment into Canada?

Bernard: Right now there is a lot of uncertainty with regard to the situation in Europe, and how the debt crisis will unfold and how it will affect the U.S. economy. And there are uncertainties in the United States with the ongoing gridlock in fiscal policy.

They will surely have a big impact on the Canadian economy, and in particular in Ontario and Québec.

Interview by Rachel Duran

Marie-Christine Bernard is the associate director, provincial forecast, for the Conference Board of Canada. She can be reached by e-mailing bernard@conferenceboard.ca. The Conference Board of Canada is the foremost independent, not-for-profit, applied research organization in Canada. Visit the organization at www.conferenceboard.ca.